Thursday, June 19, 2008

Chronicles Of Depression 2.0: #132

Treasury Secretary Henry M. Paulson Jr. plans to call today for the Federal Reserve to be given new, explicit powers to intervene in the workings of Wall Street firms to protect the financial system, adapting his vision of how the financial world should be regulated to reflect the lessons of the collapse of Bear Stearns.

"Our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk," Paulson plans to say in a speech today, according to prepared remarks obtained by The Washington Post. But the central bank "has neither the clear statutory authority nor the mandate to anticipate and deal with risks across our entire financial system."

Blah blah blah.

What's important is this bit:

Over the course of a few days in March, the central bank took unprecedented steps, with Paulson's support, to keep the rapid dissolution of Bear Stearns from causing an international financial catastrophe. The Fed provided financial backing for the acquisition of the investment bank by J.P. Morgan Chase and made emergency loans available to all major investment firms.

Emphasis added by me.

So it's admitted, but they can still distance themselves by saying those are the reporter's words, not their's.

Here's where we become the suckers -- again:

Paulson's argument, which is shared by leaders of the Fed, is that even when the emergency Fed lending program for investment banks goes away -- it is scheduled to expire in September, though the central bank could choose to extend it -- financial players will assume they would be bailed out again in a crisis. That means they may be more willing to take risks that could threaten the financial system and thus require greater policing.

"We must limit the perception that some institutions are either too big to fail or too interconnected to fail," Paulson is to say. "If we are to do that credibly, we must address the reality that some are."

Emphasis added by me.

Yeah, right. Watch them try to plug up the next hole in the rotting financial dike. You really think they'll stand by?